The New Rules of Managing Innovation

What do we do next?

Those of you who have followed this column over the past two years are aware we have written extensively about how companies like yours build and tune their innovation engine successfully.

And we have been heartened that you have told us directly—and through comments on the blog—that you have taken many of our ideas and put them into practice.

But, invariably, at the end of your comments, you say something like "O.K. What should I do next?"

Here, let's talk about four trends that we see shaping innovation in the near term, and how you should respond. The rules of the game are changing quickly, and companies that take advantage of these trends give themselves an almost unfair advantage over the slow-footed or unaware.

Trend No.1: Silos are FINALLY falling (but not in the way you may think

Close your eyes and dream with us. What if R&D, marketing, finance, planning, account services, and creative all got together for a day and were capable of birthing an idea? To some of you this dream might sound more like a nightmare along the lines of dogs breeding with cats—hard to watch and not going to happen—but to us it sounds like the future of innovation.

What some companies call departments and partners are too often emblems of inefficiency.

We consistently see that small, cross-functional teams are the key to driving industry-changing products, services, and new business models to market whether you work in a big company or a small one.

To ensure that silos are not an issue, some companies are even putting these teams in another building and saying, "you have one year to change our world—go!"

Trend No.2: Outside-in innovation

We like the saying: "You can't read the label when you are sitting inside the jar." (In fact we like it so much, we used it as a theme for a column a while back.)

Why do we like the phrase? Because we believe it speaks directly to your ability to innovate.

Let us put it as bluntly as we can: If you have been with a company for more than six months, it is time you realize something. You are stuck in the jar. The way you think about new ideas is distorted by your own expertise and the corporate container you find yourself working within. As a result, it is extremely difficult for you to see the priceless ideas that are all around you, ideas that will become the very new products and services your competitor will use to steal market share and give your boss a reason to question the effectiveness of your whole innovation strategy.

One solution? Consider open innovation. A few years back, P&G (PG) CEO A.G. Lafley declared that 50% of their innovation must come through R&D, not from R&D. By doing this, he was helping create a culture of learners instead of knowers. He was pointing out that his people were often too close to a challenge to see opportunity. He was giving them permission to find expertise outside the company. This declaration resulted in an increased success rate, lower costs, and greater speed to market.

Whatever your challenge, there is an expert in a parallel industry willing to help you overcome it.

Let us give you an example of what we mean by a parallel industry. Consider something as seemingly pedestrian as furniture polish. It cleans, protects, and restores. Now, what other things do that? Well, lawn-care and skin-care products are the first two that come to mind.

Armed with this realization, how do you gain another perspective? You could forge all kinds of formal relationships with other companies, but you don't have to do that. You can simply call an expert at a lawn-care or cosmetic company and ask to pick their brains.

We use parallel experts to solve specific technical challenges, increase excitement and momentum, shift perspective and keep us from making mistakes they made.

Remember: intelligence is learning from your mistakes. Wisdom is learning from the mistakes of others. Leading innovators like P&G are wisely leading this trend. In Innovationland, wisdom always wins.

Trend No.3: Social Media as an Innovation Tool

While many have been collecting friends on Facebook and followers on Twitter, we've been enthusiastically watching social media's rise as an effective innovation tool. Innovation is about insights, ideas, and communication. Online communities are often a perfect place to find and test insights. Online influencers are redefining the focus group. Best yet, when your online influencers help you create new products, services, or business models, they become instant ambassadors of your brand, creating the spark effect that eludes so many companies.

Here's the kicker: The emergence of social-media tracking tools give researchers and marketers alike a bevy of instant information to optimize targeting, messaging, and new product ideas. If you are a left-brained innovator, life is good. If you are not taking advantage of social media, you are missing an opportunity to create and launch better ideas faster.

Trend No.4: War Games

CEOs are increasingly asking us for the fastest way to create revolutionary change within their companies. Typically the request is rooted in their greatest fear: "what if I am missing something that is going to put me out of business?"

The rapid pace of new technology has made leaders painfully aware that it is now possible for an upstart to change the rules of the game virtually overnight. Think Orbitz. think Dyson. think eBay (EBAY). (If you believe that Sears was worried about eBay 15 years ago, well you're forgetting that there was no such thing as EBay 15 years ago.) Think Craigslist.

Growing out of this worry of being made obsolete is a closely guarded secret and a new trend in innovation: the use of war games.

In the past, war games have been an internal exercise, usually a modification of the popular SWOT (strengths, weaknesses, opportunities, threats) analysis. But what would happen if you paid a team of really smart people who knew virtually nothing about your industry to take an objective crack at building a product, service, or business model that would rock your world? What if these people used a rigorous innovation process and had access to all research and direct contact with every department head?

We call this Innovation War Games and it is exactly what more and more CEOs are secretly doing today. Worst case scenario: They sleep better at night. Best case, they are presented with an industry-changing idea that they can launch if they choose.

In order for your organization to capitalize on these trends will require you to ground them in a deep feeling of activism, meaning that every element of the process is rooted in a body of people who have such a passion for new idea, that they will find a way to get it done.

Your job as a manager will be to serve as a catalyst and coach, keeping everyone focused on the end goal (as opposed to the greater glory of their own department) and making sure you are doing whatever it takes to overcome the powers/inertia that hold back innovation.

Before it's here, it's on the Bloomberg Terminal.